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Elliot Clarke, Research Analyst at Westpac, suggests that the tone of the July/August FOMC decision statement was as unsurprising as the decision itself as “Strong” was the operative word for activity; “symmetric” for inflation; and “gradual” for policy.

Key Quotes

“Strong”, or a variant of it, was used to characterise all facets of activity in the economy. Economic “activity has been rising at a strong rate” was an upgrade from June’s “solid”. Household consumption also joined business investment in being described as having “grown strongly” after having previously “picked up” from a slow start to the year.”

“These references are not a shock given June quarter GDP printed at 4.1% annualised – driven by a similarly sized gain for personal consumption as well as robust growth in government spending and business investment, and an outsized contribution for net exports.”

“The focus for the labour market remained employment growth which again was characterised as “strong”.”

“Despite the strength of the economy, the inflation view of the Committee remained measured. “On a 12-month basis, both overall inflation and inflation for items other than food and energy have moved close to 2 percent”, the Committee’s “symmetric” objective. Taken together, these two points highlight little-to-no concern that inflation could get out of hand.”

“For policy then, the July FOMC meeting maintains the status quo of a gradual progression higher in the fed funds rate for as long as both inflation and employment dictate it is appropriate.”

“We believe this is most likely to result in four more rate hikes in this cycle, at the September and December 2018 meetings, followed by March and June 2019. If this view proves accurate, then at that time, the fed funds rate would sit at 2.875% (mid-point of range), slightly above our estimate of neutral (2.5%).”

“More to the point for activity, we expect that this will result in a US 10yr yield materially higher than the current level – a peak of 3.50% is forecast.”